Prices of cement bags are down again. In the months ending FY19, prices had actually improved in the domestic markets but since July, price competition amplified. Last week, cement prices in some cities rebounded a little but since the fiscal year began, cement spot prices have been showing a decelerating trend, particularly in cities to the north of the country where demand dynamics have not changed much and capacities have increased considerably.

On the other hand, coal prices are also down. In fact, global coal prices are at their lowest in three years owing to slashes in demand worldwide, particularly from China which wants to cut down coal imports and is also suffering on the back of its trade war with US.

As opined before: “[China] had earlier announced its commitment to cleaning its housing and protecting its deteriorating environmental and vowed to cut down coal production and imports significantly. Other markets are also witnessing a coal demand slump on the back of an evolving fuel mix, leaning increasingly on renewable energy and cheaper natural gas. The same has happened in India where demand has dried up due to low-cost renewables and coal overcapacity in-house".

Demand slump and oversupply of the commodity has caused prices to tumble which bodes well for coal users. Pakistani cement companies import most of their coal from abroad which takes up about 20-30 percent space in their total cost of production. Other fuels like furnace oil and gas are also used. Together fuel and power take up as much as 60 percent (in some cases more) share in total. Any changes in the prices of these commodities have a prominent impact on margins.

Some estimates suggest that a fluctuation in coal price of Rs100 per ton affects the cost of production by Rs15 per ton. But any gains from lower coal prices (toward margins) could be derailed by demand, retention prices, and rupee-dollar parity.

Retention prices play an important role. During FY19, cement companies combined revenue (for selected 9 players) had grown by 12 percent. Total dispatches however only grew by 2 percent for the industry (local down by 2%, exports up 38%). Mind you, prices in the export markets are competitive and hence lower than what cement companies get on home ground. It is clear that companies gained on the overall retention prices even as demand slowed down.

Then there is demand. If the Naya Pakistan Housing Plan kicks off over the next few months and construction begins in the months succeeding that, demand may see some recovery but otherwise, any major private sector spending or new public projects do not seem to be in the works, until perhaps the economic situation improves considerably.